Never Wait Two Weeks For Your Paycheck Again

After all, if you already completed the work, shouldn’t you get paid today?

If Activehours has its way, any day can be a payday.

The Palo Alto, California-based financial start-up wants to disrupt the traditional payroll model and change the way that employees get paid. Rather than wait for bi-weekly pay periods, employees would have immediate access to their paycheck based on the hours already earned.

Founded in 2012, Activehours helps its users avoid expensive overdraft fees and high interest payday loans. Payday lenders make short-term loans with steep interest rates to borrowers who need a cash bridge until their next payday. The payday lending industry has been widely criticized by the Consumer Financial Protection Bureau and Sen. Elizabeth Warren (D-MA) for taking advantage of cash-strapped customers and lending at usurious interest rates.

Rather than compete directly with payday lenders, Activehours is seeking to eliminate them. Through its mobile app, Activehours serves employees at over 12,000 companies, including Apple, Chase, Bank of America, Home Depot, Lowes, Lyft, Starbucks, Staples, Uber and Whole Foods, among others.

“People should have their money once they earn it,” said Ram Palaniappan, founder and chief executive officer of Activehours. “That’s how businesses work. When you buy something, you have to pay at once. But when you work, you wait two weeks for your own pay. We built the product so that people can manage their money the way businesses do.”

Over the past five years, Activehours has emerged as a values-based financial services company working to serve under-banked consumers, including hourly, on-demand and salaried employees. Activehours joins companies such as PayActiv, Flexwage and Clearbanc that also help employees receive their pay faster.

The Background Story

Like many entrepreneurs, Palaniappan started Activehours based on personal experiences that helped shape his views on outdated payroll practices. At a previous employer, Palaniappan found that many of his employees needed cash in between pay periods to meet their every day expenses. However, since the company paid employees bi-weekly, his employees were forced to take short-term, high-interest rate payday loans and incur overdraft fees.

“It wasn’t because we weren’t paying them well,” Palaniappan recalled. “It was because our payroll system couldn’t pay them when they needed money. Since our payroll system was holding on to their pay, I started writing checks from my personal account to them and they would pay me back on payday.”

After Palaniappan left the company and moved to California, he continued to help his former employees secure early access to their pay. When word spread and strangers started to approach Palaniappan for bridge funds, Palaniappan knew he had to build a formal product.

Palaniappan views Activehours as the antithesis to banks, and makes no quibbles about attacking overdraft fees.

“As a country, we spend more on overdraft fees than on fresh vegetables. That’s sad,” Palaniappan said. “Banks have no principles, no motivations beyond that of making a profit. What’s missing from their products are the things that make us human – empathy, responsibility, generosity and a sense of hope. In financial services, having values is a game changer.”

The Revenue Model

In its quest to bring a values-based approach to financial services, Activehours has an untraditional revenue model. While banks earn revenue from fee income, the Activehours service is free (no fees or interest). However, users may “tip” the company. Consider it a voluntary fee model – users can tip what they think is fair (typically from $0-$14 per transaction).

For many investors and industry spectators, a voluntary tipping revenue model may give pause – particularly if the no-fee model is a long-term play. While it places enormous trust with consumers, it may be difficult for the company to rely on a predictable revenue stream.

According to Palaniappan, tipping is not a short-term strategy that will be replaced longer-term with a more profitable monetization scheme.

“It is a viable long term strategy,” Palaniappan said. “A company with a product that people willingly pay for is far stronger than a company that has to force its customers to pay for its products.”

While the company does not release average tip amounts, Activehours says the model works and the revenue is predictable.

Activehours does not require a social security number or consider a user’s credit history. Activehours will work with anyone who has a bank account, direct deposit and is employed. While Activehours has formed partnerships with Uber, Kmart and Sears to provide earned pay faster to employees, Activehours works with any employer.

While Activehours wants its users to gain greater control over their finances, Activehours has instituted protections to ensure that users do not withdraw their entire paycheck at once. For example, the company offers tools to help users manage their budget and save for non-discretionary expenses that may arise throughout the month.

The Venture Capital Perspective

Earlier this month, Activehours raised a $22 million Series A financing round led by Matrix Partners. This follows the company’s $4.1 million seed round raised in July 2014.

In addition to Matrix, Activehours raised capital from other investors, including March Capital, Ribbit Capital and Felicis Ventures, the last two of which also participated in the seed round.

“Activehours stands out because they are transforming the current payroll system as the only direct to consumer payroll system in existence,” said Dana Stalder, a general partner at Matrix, who led the investment for his firm. “There is more than $1 trillion in pay held up every two weeks, and in 2015, retail banks charged consumers nearly $33 billion in overdraft fees. By allowing consumers to instantly collect pay for hours they have worked but have not yet been paid for, Activehours is transforming the way people are paid, helping them save money and secure a better future.”

Fairness. Loyalty. Values. Is this the future of financial services?

Optional tipping in lieu of fees or interest? Do you think this is a viable, long-term revenue strategy? Sound off in the comment section below.

Zack Friedman is the founder of Make Lemonade, a personal finance website that offers free financial tips and tools to help save you money on your student loans, personal loans, investments and more. Follow Zack on Twitter and read his columns in Forbes.